JetBlue / Spirit Airlines Update II
In my last post about the potential Spirit Airlines merger, I mentioned:
As mentioned, the verdict for the trial is due any day now. In the event of a ruling against JetBlue, SAVE -51.29%↓ stock could easily fall by more than 50% instantaneously. I personally like the odds, but there is still a material probability of a negative ruling.
Unfortunately, this is almost precisely what happened, as the court just ruled the merger illegal and the stock is down almost exactly 50%.
I read through the ruling, which does a good job of summarizing both sides of the case. My main takeaway is: although JetBlue and Spirit offered to divest gates to other airlines on the most contentious routes, the judge determined that this wasn’t a sufficient enough guarantee to ensure no consumers were harmed.
For example, even if another ultra-low cost carrier (ULCC) like Frontier Airlines received the divested gates, there is no guarantee that they would have the necessary planes, pilots and resources to sustain the same routes at similar levels such that consumer harm was alleviated.
The judge seemed to put particular weight on the DOJ’s expert testimony from Dr. Tasneem Chipty that the growth rates commensurate with replacing the routes would be mathematically impossible (“Even with other, new ULCCs growing and expanding and legacy airline expanding their basic offerings, there is simply no way such astronomical need could be supplied.”), and very little weight on the testimony from the airline CEO’s themselves (“this the easiest thing to go do…I mean, the scavengers would, you know, clean up this carcass within weeks.”)
This is particularly surprising considering that the court also found that other parts of Dr. Chipty’s testimony were “less thorough or methodical…and her credibility suffered accordingly” and “much of Dr. Chipty’s testimony was a recital of evidence already in the record and was thus notably lacking analysis. It would be a stretch to refer to such testimony as “expert.””
I’m not sure what my main takeaway of this experience is. The logic behind the heart of the ruling - namely, one expert who lacked credibility in many respects, testifying that other airlines were unlikely to replace demand, despite the airline CEOs themselves testifying under oath to the contrary - seems like quite a stretch (although, again, I am not a lawyer).
The judge also cited lots of case law and precedent that even the DOJ failed to cite. In many respects, the judge made a much stronger case for the DOJ than the DOJ presented for themselves. This is a good reminder that in any investment case the reality may be far more complicated and nuanced than what is publicly laid out by both sides.
This experience is also a good lesson about the importance of position sizing and overconfidence. Although I felt fairly confident in the outcome, and instinctively wanted to put on a larger position, I forced myself to stay within a smaller limit (although, in hindsight, I wish it were smaller!)
With that said, given the same situation, and the same perceived odds (which, despite the ruling, I don’t think were materially off), I’d probably make the same bet. Although the outcome was undesired, it was well within the accepted realm of possibility, and I am happy with the decision process.